IRS credit-card plan called 'insane' Critics fear payment by plastic will deepen consumers' debt

Income taxes

August 30, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

Financial experts believe that Uncle Sam's decision to let people pay for their federal income taxes with a credit card could drive consumers deeper into debt and force them to spend more money on interest payments.

The Internal Revenue Service's decision, announced this month, comes at a time when Americans are drowning in credit-card debt and personal bankruptcies are swelling.

"I think it is absolutely insane," said William Keating, a debt counselor who teaches finance courses at Montgomery College and Johns Hopkins University. "The IRS has just put the American consumer deeper in debt. I don't see it as being convenient at all."

Keating is not alone in his feelings.

"I don't like it," said Glen Buco, a financial planner at Annandale, Va.-based West Financial Services.

"Tax payments tend to be high payments. I think it has the potential of really getting people in deeper trouble."

The IRS' decision will affect millions of taxpayers. About 30 percent of taxpayers each year owe money to the federal government. In 1996, the agency received 118.8 million returns and about 35 million of those filing owed money.

So why not let taxpayers simply charge it? Americans have been using credit cards for about 40 years, and they have been quick to slap on plastic big-ticket items such as medical bills, college tuition and vacations.

"It is just another consumer option, a consumer service that is trying to help taxpayers comply with their obligation of filing their returns and paying taxes," said Domenic J. LaPonzina, the IRS spokesman in Baltimore.

LaPonzina said there is nothing sinister about letting taxpayers pay with plastic. He places the decision squarely upon the individual's shoulders.

"If the taxpayer feels they have a credit problem or crunch, they need to think long and hard about this option," he said.

"It is not something we are mandating or forcing, it is an option."

There are two ways taxpayers will be able to use credit cards to pay their income taxes.

People who have Discover, MasterCard and American Express can charge their balances by calling a toll-free number managed by San Ramon, Calif.-based US Audiotex. It doesn't matter if they file by mail, computer or use a preparer.

'Convenience fee'

Taxpayers who use Intuit's TurboTax or MacInTax computer software to prepare their returns can charge the balance to a Discover card, or one of the many credit cards issued by Novus Services Inc., a Riverwoods, Ill. company that is handling the payments for the agency.

Novus and U.S. Audiotex will charge the taxpayer a "convenience fee" based upon the amount they put on the credit card, LaPonzina said. Specific details about the fee have not yet been released.

"I think it is a great program as a consumer," said Gail Wasserman, a spokeswoman at New York-based American Express Co. "We want to make it as easy and convenient for people to make a payment.

"Obviously, it benefits us because every time somebody makes a charge, we earn revenue," Wasserman said.

Stephen Brobeck, executive director of Washington-based Consumer Federation of America, agrees that paying taxes with a credit card will be convenient, but it stands to put more taxpayers deeper in the hole and lead them to carry more debt longer.

He estimates that 55 percent to 60 percent of households in the country carry a credit-card balance from one month to the next of more than $7,000.

A way to earn perks

"An additional $1,000 to $2,000 of tax obligation to that amount could make it more difficult to pay down that costly debt," he said. "I really don't know why they are doing this."

Putting an income tax bill on a credit card could be a good thing for people who can pay it off when the bill comes due. Some will use it as a way to earn more free airline miles and gasoline, perks that some credit cards offer.

But for people who carry a balance, paying off the debt could be like bailing out a bucket of water with a teaspoon, Keating said.

He pointed out that it would take more than eight years for a taxpayer to pay off a $3,000 tax bill on a credit card with a 19 percent interest rate, assuming the person pays $60 a month.

Worse, Keating said, the taxpayer would be paying an additional $3,000 in interest by the time the debt is wiped away.

It might be better to pay the bill in installments under an IRS payment plan, Keating said. The agency charges 8 percent interest plus a penalty of a half of 1 percent a month, which works out to be 14 percent annually.

Bargaining power

Experts worry that if taxpayers pay their bill with a credit card and then fall behind on payments, they could lose bargaining power if they have to negotiate with a big credit-card company rather than the IRS.

"I would think the credit-card companies are nastier," Buco said.

On the other hand, Keating said if taxpayers make payments directly to the IRS and fall behind, they "maintain their right to negotiate." The agency also has an ombudsman who listens to appeals.

LaPonzina said that taxpayers who use credit cards to pay their bill still have the right to amend their returns and seek refunds if they overpay.

"It is not going to affect at all your appeal rights or various rights that are afforded to you in the code," LaPonzina said. "It is no different than if you wrote a check."

Pub Date: 8/30/98

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.